Glenn Chan's Random Notes on Investing

Fortuna Mining

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Let’s take a look at their latest MD&A:

I call bullshit.  If you look at the breakdown above, you can see that management expects a ramp in Tonnes milled and a ramp in Au and Ag grades.  Sane mine engineers do not make plans like this.  First off, it is optimal to mine the highest grade ores first to maximize the net present value (NPV) of the mine.  In some mines lower grade ore has to be mined first to get to the highest grade ore.  But generally speaking, you should pretty much see the highest grade ore get mined first.  Mining the highest grade ore 2 years before mine closure makes absolutely no sense at all.

Secondly, the breakdown above calls for production to ramp up to more than four times over four years.  This is a dopey way of building a mine.  It makes more sense to build to a specific capacity by year 1/2 of commercial production as this would maximize the NPV.

What’s probably happening here is that management is making stuff up.  It is highly, highly likely that grades will go down over time according to the mine engineer’s plans.  And my personal opinion is that this company will likely miss its production targets and that this will be blamed on external factors.

Is it any wonder that commodity futures outperform commodity-producing companies by three times?

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